• SONA: Government’s inclusive growth plan
Articles:

SONA: Government’s inclusive growth plan

07 February 2019

Ferdie Schneider , National Head of Tax and Tax Partner |

President Cyril Rampahosa will be delivering his State of the Nation Address (SONA) on Thursday 7 February 2019, days before Mr Tito Mboweni’s National Budget Speech. President Ramaphosa is expected to revisit government’s nine-point plan to stimulate economic growth and employment. The projected GDP growth in the short and long-term, is expected to take centre-stage. National Treasury’s action plan includes interventions to support the nine-point plan, allocated to responsible authorities, and allocates timelines to achieve these. Some of the more tangible and welcomed initiatives include introducing a micro-insurance framework and reviewing the Cooperatives Banking framework; engagements to dispose of non-core assets; conducting detailed audits of non-strategic SOC assets to strengthen their balance sheets; finalising the recapitalisation of SAA and SAPO; reducing the issuance of government guarantees for operational reasons; determining consequences for SOC non-adherence to guarantee conditions; approving terms of reference for implementing the SOC remuneration standards oversight committee; consulting SOCs on costing developmental mandates; implementing mechanisms to effect outcomes through corporate plans; finalising the appointment of a SAA CEO and implementing a 5 year turnaround plan; directing the Competition Commission to investigate data prices; and finalising the Minerals and Petroleum Resources Development Act Amendment Bill Amendment Bill after consultation.

Although the devil is in the detail, these initiatives are welcomed on the one hand, but on the other also concerning due to the potential cost. If the Minister’s undertaking that the funding will be done through reprioritising from low to high growth areas is upheld, the concern is softened or even disappears. However, the South African taxpayer has, over the last number of years, seen substantial increases in the tax burden. With a top marginal rate of 45% for personal income tax payers (for earnings exceeding R1.5 million) and a tax Freedom Day reached at around May of each year (on average, the South African taxpayer works until mid-late May purely to pay taxes), the tax burden weighs heavily on the individual. The current economic, social, and political state in South Africa, and the already heavy tax burden also makes further extraction through the tax base nearly impossible.

Taxpayer morality and the willingness to pay your taxes are influenced by the perception of the taxpayer that the tax revenues are put to effective use and that a tangible benefit is received in the form of collective goods or services (such as socio-economic infrastructure) provided by government. If government creates the perception that revenues are managed carelessly or even mismanaged through fraud or corruption, this impacts taxpayer morality and the willingness to contribute to the fiscus. Often taxpayers only have a choice between paying their taxes or moving their hard-earned capital or money to low or no tax jurisdictions which often result in a brain drain.

This, amidst a new President that is continuously wooing foreign investors to attract FDI, and focusing on the general elections a bit later this year. Mr Ramaphosa has a few internal political battles on hand, one being to diminish the impact of the Zuma-era, which has left South Africa under a cloud of corruption, following wide-spread underperformance of State Owned Enterprises (SOEs), and the not-so-distant impact of the Gupta-era, the mismanagement of SARS (ala Nugent), and the many other problems South Africa are facing.

These battles are further accentuated by widespread voicing against corrupt governance, battling SOCs, state capture following the infamous Gupta saga, the pressures on social grants, steep personal tax increases (introduced in February 2017), ratings downgrade, and the recent announcements that outward employees (expats) will lose part of their South African tax-exempt status from 1 October 2020 (only R1 million will remain tax exempt).

National Treasury is developing South Africa’s inclusive growth plan to the slow / no GDP growth, the recession, rising government debt, financial performance of SOCs, and policy uncertainty and low business and consumer confidence.

The President and the Finance Minister will have to manage the growth agenda and the funding thereof very carefully.

Read more BDO Insights